Bank NPA resolution is shrouded in fears of various kinds; it's time for RBI to act

The much-awaited Bank NPA resolution ordinance finally came on Friday empowering the RBI to take a more proactive role in the resolution of default loans. Clause 35AA allows the RBI to direct banks to mandatorily send cases to the NCLT (the National Company Law Tribunal) under the Bankruptcy Code. In all probability, the government is asking RBI to follow Viral Acharya’s suggestion (made in his IBA speech) that 50 largest stressed assets be listed and the banks be given a deadline of say 31 December. Cases not resolved by then will automatically go to the insolvency courts.

While this will put promoters and bankers under pressure to find solutions, six months could be adequate for some and inadequate for others. The top 50 cases could include a steel companies, gas-based power companies and thermal power companies. For gas-based power companies there really is no immediate solution. They may sell for a song. Steel defaulters will in all probability get haircuts to their loans since there is a paucity of buyers and those available are demanding higher hair cuts. Any which way, it is likely banks are going to end with larger provisioning requirements. If the RBI’s AQR or asset quality review, summarily pushing large stressed loans to NPA category was seen as ham handed, sending the same cases to insolvency by the same top-down approach may appear more ham handed in some cases. But there is probably no choice.

Reuters

The second clause in the ordinance, 35AB(1) says the RBI may issue directions on stressed asset resolution. The RBI is already providing tools like S4A (structuring of sustainable stressed assets) and SDR (strategic debt restructuring). Is the new clause intended to make RBI give actual instructions on specific cases? That would be an invitation to disaster. Central banks cannot and should not make commercial decisions. Hence the purpose of the clause 35AB(1) is puzzling.

Clause 35AB(2) empowers the RBI to set up committees to “advice” banks on resolving stress loans. One thought the RBI committee will “oversee” only the process. If the committee starts advising on the nature of resolution, the RBI will get into a serious moral hazard issue. How can an RBI committee advise bankers to take haircuts in a specific case. Won't the RBI itself be open to charges of cronyism? What if the resolution suggested by the RBI committee fails? Will the RBI be held responsible and investigated? Possibly the committees will stick with vetting the process only.

The other announcement on Friday came from the RBI and it basically strengthened the role of the larger lenders in the Joint Lenders Forums and blunted the ability of the smaller lenders to veto resolutions. These could have been announced without the ordinance. One wonders why the RBI waited so long.

The bigger announcement from the government on Friday that could have a material impact on the resolution process is demoting two bank MDs (that of PNB and Bank of India) to smaller banks. Before coming to the merit of the decision, the process of announcement is questionable. Should not the boards of these banks be asked to take this decision. The government is the dominant shareholder of PSU banks and always has the right to change the CEO. But the process requires the government nominee in the board to move a resolution to remove the CEO. This summary setting aside of the bank boards and even apparently the bank board bureau is a blow to building the institution of the bank board.

Now for the substantive part: The apparent reason behind the move is their progress on NPA resolution was unsatisfactory. These banks repeatedly vetoed solutions in the JLF, say some. This puts bankers in an extremely unenviable spot. If they take haircuts they could get arrested for cronyism; if they resisted they could get demoted.

In fact, the entire issue of NPA resolution is shrouded in fear. The RBI lives in fear of being asked to take commercial decisions and hence wants an overt backing in the form of an ordinance. The government lives in fear of being accused of condoning big businessmen from paying tens of thousands of crores that they have taken from banks. One can understand why the ordinance took so long.

But now that the bullet has been bitten, the RBI needs to speed up the process of setting up the committees and identifying the first list of assets. More importantly, it needs to speed up approving the bunch of foreign funds wanting to set up ARCs in India so that there is competition to buy the stressed assets. One hopes this doesn't trigger a fresh fear: that we are selling all our precious assets to foreigners!